Housing bailout pays for second mortgages,liens and investments

Nation: Remember Obama's talk that people who flipped or made bad decisions wouldn't be bailed out? He lied.

Amid the dozens of pages of details of the Obama mortgage modification plan, one new element will likely not make it into the headlines because it’s something of an afterthought. It has to do with second liens, that is piggy back loans or home equity lines of credit. Deep deep in the pages of the plan, is paragraph vi. Second Liens: While eligibly loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens. Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien. So in an effort to help borrowers stay current on their newly modified loan, which is at a nice new 31% debt to income ratio, the government is also going to pay cash money to get servicers to totally wipe out second liens. When I heard this I thought there might have been something funky in my morning muffin. It’s not that I don’t get the reasoning. Sure, do all you can to help people pay their mortgage, like get rid of other debt. By why stop there? What about car loans? Student loans?? The second liens, in general, were used by borrowers to either buy more home than they could really afford or to use their homes as ATM machines. Yes, some people use home equity lines of credit to pay college tuition. But I can’t tell you how many homeowners I’ve interviewed (and just take a look at David Faber’s documentary House of Cards to see more) who took out home equity lines to put in a pool or buy a fancy car or put an addition on the house that includes a fancy new kitchen with a Viking six-burner. And I’m supposed to pay for all that?

Washington Post:

Homeowners with loans as large as $729,750 could see their interest rates temporarily cut to as low as 2 percent under the program. The administration also said it will add new incentives to persuade lenders that hold second mortgages to give up their claims, further lowering homeowners' debt obligations. While the Obama administration initially said it would focus on owner-occupied properties, Fannie Mae and Freddie Mac said they would refinance loans for some second homes and investment properties, too.

NYTIMES:

Q. What happens if I have a second mortgage? A. All borrowers with modified mortgages who make timely payments for three months will have the opportunity to have any second mortgages forgiven. As part of the plan, the Treasury will make a cash offer to the owner of the second mortgage to forgive the debt (the amount of those cash payments has not yet been determined). The lender can refuse the offer. But the lender is likely to collect more money than if the home was lost to foreclosure, when it would receive nothing.

Responsiblity is for suckers.